Weekend Reading for Financial Planners (May 11-12)

Executive Summary

Enjoy the current installment of “weekend reading for financial planners” – this week’s issue starts off with a surprising announcement that the CFP Board is considering a questionable proposal about whether to offer CE credit and go into direct competition with the CE sponsors it regulates (with advisors expressing strong concern about the conflict of interest that entails), along with two articles reporting on advisor trends in the industry, including a continued slide in the total number of advisors and wirehouses in particular, along with a contrasting view that the decline of wirehouses and the breakaway broker trend may actually be quite overstated.

From there, we look at a few behavioral-finance-related articles, including a controversial study suggesting that as many of 93% of financial advisors experienced symptoms of PTSD after the 2008 financial crisis and that the recent rise of tactical asset allocation may be a stress-driven response, a review of another recent study suggesting that the world of a fund manager is also a much more emotionally-driven experience than many might have thought, a discussion from the Journal of Financial Planning about the importance of focusing not just on a client’s risk tolerance but also his/her risk perceptions (and the ways those perceptions can be distorted), and a review by Joel Bruckenstein of a new software package called Riskalyze that is aiming to provide a slightly newer way to assess client risk tolerance.

In addition, there are a few technology-related articles, including a reminder of the importance of considering not just software vendors and products and integrations in your technology decisions but also the staff that must implement it, some guidance from technology consultant Bill Winterberg about how to protect your firm and clients against so-called “phishing” attacks, a look at how some RIAs are successfully using social media to generate new clients, and a great article by Dan Moisand suggesting that the “rise of the machines” is not so much a threat against advisors as an opportunity for them to use technology for better efficiency.

We wrap up with an article reviewing recent research from Julie Littlechild, suggesting that just relying on client referrals by just making them satisfied and happy with your services isn’t enough, given that surveys indicate 88% of clients are willing to provide a referral yet only 2% actually do provide one that successfully closes; instead, the real key is to create engaged clients who will refer you not because they’re satisfied, but because you know how to solve the problems of one of their friends or family in need. Enjoy the reading!

(Editor’s Note: Want to see what I’m reading through the week that didn’t make the cut? Due to popular request, I’ve started a Tumblr page to highlight a longerlist of articles that I scan each week that might be of interest. You can follow the Tumblr page here.)

Weekend reading for May 11th/12th:

Possible CFP Board Foray Into Continuing Ed Worries Advisers – This week the CFP Board announced that it is considering whether it should get into the continuing education business, offering CE credit directly to CFPs in direct competition with the CE sponsors it oversees. Feedback at NAPFA, and also from FPA Retreat earlier this week, was strongly negative, highlighting the fundamental conflict of interest that exists if the CFP Board offers CE while also overseeing 1,250 registered CE sponsors. CFP Board CEO Kevin Keller was dismissive of the conflict, claiming that “everybody has conflicts” but members maintained it still allows the CFP Board an unfair advantage. Feedback suggested that the CFP Board should focus on improving the quality of CE education by other means (a recent topic on this blog as well), and that the move could threaten the integrity of the organization. Ultimately, Keller noted that if the CFP Board moves forward with a proposal, it will be in November at the earliest.

Adviser Numbers Will Continue To Slide: Cerulli – The total number of financial advisors fell by about 4,000 last year, finishing just above 300,000 total, and Cerulli Associates projects that the numbers will continue to decline by another 18,600 in the coming 5 years as the industry in the aggregate is still failing to recruit enough advisors to replace those leaving and retiring from the industry. Although the wirehouses have had some uptick in hiring and training, Cerulli notes that the independent broker-dealers and RIAs still don’t have a strong means and model for hiring and training a large number of new advisors, and wirehouses and insurance companies alone cannot support all the necessary growth. In terms of channels, Cerulli sees the wirehouses declining by 2.4% per year, notwithstanding their hiring, due to aging retirees and also breakaway brokers leaving to other channels; on the other hand, notwithstanding their breakaway additions, Cerulli sees the independent broker-dealer channels declining by a whopping 5% per year. On the other hand, the RIA and hybrid channels are still poised for growth, with projected growth through the end of 2016 of 4.7%/year for RIAs, and the highest growth rate of 5.3%/year for hybrids as advisors transitioning to the RIA model increasingly decide to remain hybrids instead.

Breakaway Brokers: What the Data Really Say – This article by Bob Veres on Advisor Perspectives highlights some of the recent research from the Tiburon CEO Summit regarding the breakaway broker trend, suggesting that the trend may be drastically overstated. At the summit, Tiburon chief Chip Roame noted when once intra-wirehouse transitions are netted out, the total amount of assets that actually broke away from wirehouses last year was about $19.3 billion – while that’s no small amount, the reality is that it’s barely a drop in the bucket for the $5 trillion of wirehouse assets. In fact, Roame notes that even if the data is wrong and the trend is double the estimate, it’s still only about 2% attrition for wirehouses, which is arguably indistinguishable from “natural” business activity. Furthermore, many of the brokers who are leaving were actually fired for low assets and production – they didn’t actually “break away” – which suggests that in truth the estimates of how much in assets is breaking away might actually still be overstated, not understated, as small as it already is! Accordingly, Veres raises interesting questions about whether the wirehouse model is really on its way it – as much of the industry press has been suggesting – or if the truth is that the firms, including several major independent RIA custodians, that have been growing from the breakaway broker trend are really just feeding on the meager throw-away scraps from the wirehouse table? On the other hand, some of the firms that have been attracting breakaway brokers suggest that while the numbers may not be significant, wirehouses are not just losing some of their “smallest” advisors but also some of their most talented, and that this drain of top advisors will have a growing impact over time as existing brokers see that their “credible” brethren are going independent and their success stories are told.

93% Of Financial Advisers Had PTSD After 2008 – According to a recent study published in the Journal of Financial Therapy, a whopping 93% of advisors experienced symptoms of Post-Traumatic Stress Disorder (PTSD) in the aftermath of the 2008 financial crisis, including sleeplessness, and bouts of anxiety and depression; approximately 40% suffered severe symptoms. Notably, PTSD can cause significant shifts in behavior, including an increase in risk-taking behavior, and the study suggests that such tendencies may have contributed to the ways that advisors have been rethinking their investment strategies and shifting towards tactical asset allocation, which recent studies have indicated are on the rise with a majority of advisors. Of course, some advisors simply inssit that their investment strategies and implementation have evolved naturally, and that today’s market environment really is fundamentally different than the past; nonetheless, the study raises interesting questions of whether the stress of the financial crisis may have at least accelerated the trend towards tactical strategies.

Emotional Finance – From the Research Puzzler blog, this article takes an interesting look at a recent article from the Research Foundation of the CFA Institute entitled “Fund Management: An Emotional Finance Perspective” which reveals the remarkably emotional forces that impact mutual fund managers. For instance, because so many fund managers are judged based on relative performance, they actually can become remarkably insulated from typical market volatility – as long as it moves their fund and their benchmark by the same amount – yet at the same time fund managers can become deeply concerned and obsessed about not straying too far from the consensus, which introduces a material “risk” of underperforming a benchmark and endangering their career. In addition, fund managers are often still prone to the same human behavioral mistakes as others, including a heavy reliance on storytelling to justify what’s happening in the markets, whether the companies and management they’re invested in are “good” or “bad”, and what’s happening to the fund managers themselves, including classic “errors” like crafting stories that attribute successes to themselves and failures to random, unlucky external forces. The discussion also touches on obsessions about performance, distorted incentive structures (if you’re up for the time period, just “hit the index key” and ride the benchmark to keep your bonus), emotional cycles, and more. Of course, not every fund manager will necessarily be as emotionally distraught as the research discusses, but the article nonetheless makes the fundamental point that outsourcing investment management to a third party does not necessarily immunize the client’s portfolio to the forces of human emotions.

Help Investors Make Better Risk/Reward Decisions – This article from the Journal of Financial Planning makes the point that many clients – and sometimes their advisors! – misperceive risk, overestimating or underestimating how dangerous our investments (or other activities) might be. Yet having proper risk perception is crucial; otherwise, clients even highly risk tolerant clients may bail out of their portfolio by misjudging how much risk they’re taking. The article lists a number of key factors that impact our risk perceptions, that planners should bear in mind when working with clients (and considering their own risk perceptions!), including: trust (the more we trust, the less afraid we are); risk versus benefit; control (things seem less risky when we feel in control of them); choice (did we choose the threat/risk or was it foisted upon us?); natural vs man-made risks (the latter are scarier than the former); horror (the worse the potential outcome, the more we’re afraid of it); catastrophic vs chronic (we’re more afraid of severe catastrophic risks than chronically harmful ones); uncertainty (the greater the uncertainty the more risk we perceive); me versus them (the risk seems bigger when we really fear it can happen to us); new vs familiar; children (we fear risks to children more than risks to adults); personalization; fairness/morality; and awareness (the more aware of the potential risk we are, the more we fear it). The article suggests that ultimately by being aware of their risk misperceptions, and being able to explain them to clients, you can help clients consider their risks more accurately, and not over- or under-estimate them.

Building a Smarter Portfolio – In Financial Planning magazine, technology consultant Joel Bruckenstein reviews Riskalyze Pro, a new cloud-based software platform that helps to do risk assessments for clients (in addition to offering some portfolio construction tools). The risk assessment process entails a questionnaire – similar in concept to other risk tolerance questionnaires – but Riskalyze is a bit different, in that it then asks retirees about a series of tradeoffs such as “would you prefer a 100% chance of a 10% gain, or a 50/50 chance of either a 50% gain or a 20% loss?” As a series of multiple trade-offs are asked and answered to the client, a “risk fingerprint” is established that tracks how the client views risk, resulting in a final score from 1 to 100; for instance, a score of 70 might indicate a willingness to risk a 15% loss for a 23% gain. What’s unique about Riskalyze, though, is that once the score and comfortable trade-offs are assessed, the client and advisor can then review the client’s actual holdings in light of this tolerance, and see whether the investment positions are within the identified parameters (and if not, Riskalyze can help to optimize the portfolio to something that would be appropriate). Overall, Bruckenstein says the software is very easy to use, and the graphics (including multiple portfoio analytics charts) are client-friendly; however, Bruckenstein notes that at this point the software has no integrations, which means you can’t automatically pull email addresses from your CRM to send the assessment to clients, nor can you push the results from Riskalyze into your CRM or financial planning software. In addition, Bruckenstein notes that some advisors may question the robustness of Riskalyze’s particular risk assessment approach. Nonetheless, Bruckenstein suggests that Riskalyze may be very effective as a marketing tool, given the speed of use with clients, and that if the software is adopted more widely, the desired integrations may soon be developed.

Who Are Your Technology Players? Don’t Overlook Your Employees – This article from Dan Skiles in Investment Advisor magazine makes the important point that making good technology decisions isn’t just about picking the right software vendors, products, and integrations; it’s also about your staff that will use and implement the software, and that too often the “person” part of the equation is ignored. And this isn’t just about having a “tech person” in the office; if the ultimate goal is for employees to incorporate new technology into their daily habits and be more productive, you need a plan to get everyone on board. Skiles suggests that a good starting point is to expand how many people are involved in your technology decisions; although they may not have final say, the earlier your staff is involved in the process, the more likely they are to buy into the solution. And make sure your employees are involved and cross-trained for multiple positions; the value is not just in the workflow efficiency for your firm, but the fact that employees who have a broader perspective of everything that happens in the firm will have a better understanding of how potential new technology will impact multiple parts of the firm. In addition, be certain to assess on an ongoing basis whether it still makes sense to handle a certain job task or duty internally, versus outsourcing it; if you don’t want to let go of staff or change their role to outsource, at least realize that when employee turnover does occur, it’s a good opportunity to re-evaluate his/her role altogether. And don’t forget to invest in technology knowledge for your employees; sending them to training sessions, webinars, or even vendor conferences, can provide a strong return on investment in the firm’s employees.

Protect Against Phishing Attacks – In Morningstar Advisor, technology consultant Bill Winterberg provides guidance to advisors about how to avoid “phishing” attacks – where hackers try to steal information not by hacking passwords directly, but fooling people to type their passwords into unsecure websites to steal the login credentials and then take that information and use it for serious mischief; for instance, the recent Associated Press hack into their Twitter account appears to have been driven by a phishing attack for the password against AP employees. Winterberg suggests that this is a growing risk for advisors – as highlighted last year, thieves are increasingly targeting advisors directly for wire fraud and other attacks – and that one of the best ways to manage the risk is to test fake phishing attacks on their own firm and staff and try to determine whether there are any weaknesses. There are actually services that can help do this, such as Trace Security, which allows you to enter email addresses of employees, have fake phishing emails sent to them, and monitor the results from a software dashboard. A more robust offering (albeit also much more expensive) is PhishGuru, which has a wide array of prebuilt fake phishing templates you can use to test your employees and their processes and procedures for handling questionable emails. Winterberg emphasizes that ultimately the goal is not to catch employees for poor security practices, but to reveal and recognize security concerns so that staff can be trained to be cautious about embedded links in emails, look for the https:// connection in the website url for secure sites, and develop firm procedures like standard follow-up calls for unusual emails, all with the goal of reducing the risk of a real phishing attack succeeding in the future.

RIAs Recount How They Reap New Clients Using LinkedIn And Twitter – This article from RIABiz highlights advisors who have been using social media to successfully attract new clients, and finding the balance for it amidst the rest of their busy days. For instance, Jude Boudreaux of Upperline Financial has gotten 8 new clients over the past two years through social media, investing no more than 30 minutes per day in his social media activity and often in short bursts of just 5 minutes here and there as he has time; as Boudreaux views it, social media is a marketing avenue that allows him to engage with prospective clients without the costs of traditional marketing. Advisors Cathy Curtis and Alan Moore are also highlighted for their successes on social media, including LinkedIn, Twitter, and Facebook. And their success appears to be part of a broader trend towards social media adoption; a recent study from LinkedIn found that 44% of the mass affluent are now engaging with financial companies via social media, and that the mass affluent – and even the uber wealthy – are using social media as a part of the process to research and vet a prospective advisor.

Rise Of The Machines? – In the Journal of Financial Planning, Dan Moisand looks at the rise of technology and whether machines pose a threat to human financial planners. On the one hand, technology continues to march forward – remember it wasn’t long ago that we were amazed a web page might load in “just” 10 seconds via a dial-up modem! – and the leverage that technology provides allows us to do some extraordinarily complex analysis for clients with a wide range of scenarios in a very efficient manner. And the connectivity of technology is making it easier for clients to connect with their advisors anytime, and from anywhere, not to mention helping to make the Rolodex and “tickler” reminders must easier to access and automate. Yet at the same time, there is a darker side to technology; the unrelenting march of progress makes it difficult to keep up with what technology can do, how to use it, and making good decisions about it, and the rise of the so-called “robo-advisor” is threatening to challenge financial planners directly as automated competition. Ultimately, though, Moisand suggests that robo-advisors are nothing to lose sleep about; technology has been progressing for a long time, and continues to do so, but the reality is that for decades the technology improvements have not threatened advisors but helped them to be more successful. Beyond that, the reality is simply that real human financial planners provide important value that machines cannot replace, because the real value has never really been able just doing better number crunching, but about making good decisions in light of those numbers, and computers just can’t put context to the analysis the way other humans can, and more advanced technology is still useless in the hands of inexperienced and unknowledgeable hands. And of course, the reality is simply that for many clients, the whole point of working with an advisor is to delegate the work, which means having fancier technology to do-it-themselves will never be appealing.

What You’re Getting Wrong On Referrals – This article discusses a recent presentation by advisor consultant Julie Littlechild at the Envestnet Advisor Summit; during the session, Littlechild pointed out that most advisors think clients will give referrals simply because they are satisfied and well served and want to help their advisor, even though the research actually shows that most advisors make referrals because they want to help a friend who has a problem find a solution and that it’s actually not about the advisor. The end result: according to Littlechild’s research, 88% of clients are willing to provide a referral, but only 28% actually do, and only 2% of those referrals are successful; in other words, satisfaction alone just isn’t enough to generate real business. Instead, Littlechild finds the key is client engagement – clients who are “engaged” are those who “place a high value on advice relative to the fees they pay and see the advisor as a proactive leader in their life” and generate virtually all of an advisor’s referrals (an average of two referrals per year per engaged client). So how to you stimulate referrals from engaged clients? Find a ‘triggering action’ (make sure you get a name to follow up when there is a referral opportunity); be able to explain your value in plain English (as discussed previously on this blog, if you can’t explain your value to your clients, how can they possibly explain it to someone else?); research yourself by asking clients for their perspective on what it’s like to work with you (so you better understand how to explain it to others); and consider planning a targeted event (an event for a group that has something in common is more effective than an invite list that is overly broad).